25921 Theory of Financial Decision Making
UTS: Business: Finance and EconomicsCredit points: 6 cp
Subject level: Undergraduate
Result Type: Grade and marksHandbook description
This subject introduces the foundations of modern portfolio theory and how it is applied. Topics covered include: theory of choice; mean-variance criterion; capital market equilibrium; capital asset pricing model and arbitrage pricing theorem; and equilibrium evaluation of derivative securities.
Subject objectives/outcomes
On successful completion of this subject, students should:
- have a broad overview of the main issues in the theory of financial choice under uncertainty
- have a detailed understanding of, and competency in manipulating, the mean-variance criterion
- have a detailed understanding of the theory and application of the capital Asset Pricing Model (CAPM) and Arbitrage Pricing Model (APT) as tools for the management of portfolios
- have an understanding of the main issues in the theory of the functioning of the financial market
- be able to apply capital market equilibrium arguments to value derivative securities.
Contribution to graduate profile
This course deals with the theory of investment decisions under uncertainty. Its purpose is to provide the foundations for the study of modern financial economics. It focuses on the rational investors consumption and portfolio decisions under uncertainty and their implications for the valuation of securities. The main ideas used in this course are optimality, equilibrium and arbitrage. These are indeed the concepts upon which much of modern financial economic theory is built.
Teaching and learning strategies
Lectures held once a week. Assignments to develop problem solving skills.
Content
- The theory of choice
- Consumption and investment with capital markets
- The mean-variance criterion
- Capital market equilibrium CAPM and APT
- Aggregation in securities markets
- Equilibrium valuation of complex securities.
Assessment
Assessment item 1: Assignments
| Objective(s): | 1-5 |
| Weighting: | 20% |
| Task: | Two assignments – one reflecting the practical and applied nature of the course will develop problem solving skills and the other requiring a report on one of the papers of the key topic areas. Assignments thus assure objectives 1-5. |
Assessment item 2: Mid-Semester Examination
| Objective(s): | 1-5 |
| Weighting: | 30% |
| Task: | Students will be required to demonstrate an understanding of financial decision making. The mid semester exam assures objectives 1-5. |
Assessment item 3: Final Examination
| Objective(s): | 1-5 |
| Weighting: | 50% |
| Task: | The final examination will test students understanding of the course material. It will enable students to demonstrate they have met objectives 1-5. |
Required text(s)
The course will be based on the notes 'Financial Decision Making Under Uncertainty' by Tony He.
Indicative references
Copeland, T.E. and Weston, F.J. (1988) Financial Theory and Corporate Policy, Addison-Wesley, 3rd ed.
Eichberger, J. and Harper, I.R. (1997) Financial Economics, Oxford.
Huang, Chi-fu and Litzenberger, R.H. (1988) Foundations for Financial Economics, North-Holland.
Levy, H. and Sarnat M. (1984) Portfolio and Investment Section, Prentice-Hall, 3rd edition.
Levy, M, Levy, H. and Solomon S. (2000) Microscopic Simulation of Financial Markets: From Investor Behavior to Market Phenomena, Academic Press, Sydney.
Christian Gollier (2001) The Economics of Risk and Time, The MIT Press, Cambridge.
Cvitanic J. and F. Zapatero (2004) Introduction to the Economics and Mathematics of Financial Markets, The MIT Press, Cambridge, Massachusetts.
Lecture slides
The lecture slides will be distributed to students through UTSOnline.
Websites
www.asx.com.au (Australian Stock Exchange)www.sfe.com.au (Sydney Futures Exchange)
www.cbot.com (Chicago Board of Trade)
www.cme.com (Chicago Mercantile Exchange)
www.isda.org (International Swaps and Derivatives Association)
www.riskmetrics.com (RiskMetrics)
